While leasing is one of the most comfortable and cheap solutions for small business all over the world, it still is below par due to a low awareness and high prices in Georgia. The lack of regulation and poor management skills are the reason for this, some analysts say.

Left to the mercy of the banks alone, Georgian industry cannot develop as fast as it might if it would be supported with leasing as best practices show. But Georgian leasing

is not cheaper than banking loans. Leasing companies swear leasing is better and cheaper thanks to its built-in benefits but low awareness creates a challenge. According to statistics from the European Central Bank, 34% of the SME sector in Europe applies to leasing whereas in Georgia this figure is so small that nobody tries to even calculate it. At the moment four leasing companies are operating in Georgia [since 2001] while there are operating 21 banks. Today, the Georgian leasing sector only covers just around 0.3% of the GDP while the banking sector cuts over 63%. Sector pundits say the reason for this is that leasing is more expensive than a bank loan. Leasing companies insist that the interest rates are very close and that leasing is cheaper thanks to its invisible money-saving effects. “All in all, if all these invisible benefits are calculated, 15% of the leasing may be more profitable than 12% of the bank loans,” says Nana Mikashavidze, Director General of TBC Leasing.According to all leasing companies, the low awareness of these benefits scares off potential clients. On the other hand, the financial crisis of 2008 and the imperfect legislation had a negative impact on this sector which only recently increased from GEL 40 million in 2007 to around GEL 74 million. Once the law was streamlined in 2011 it managed to ride out the crisis and started growing slowly. Lia Eliava, a financial market analyst, believes the low awareness of Georgian leasing and its poor portfolio bespeaks of imperfect management skills. “This low awareness means that the leasing companies do not explain their benefits to their potential clients. Who is expected to do this marketing campaign for them?” Eliava asks. “The real reason small business do not go to them is that their price is expensive. Best practice shows that if the leasing price exceeds 3% its benefit is zeroed whereas the leasing rate reaches 20-25% in Georgia. Normally, leasing is calculated on 5-10 years and no small producer can afford a payment which such high rates per year.”According to her, the reason Georgian leasing companies enjoy high rates is because of the absence of regulation. Georgian leasing companies are regulated by just a few paragraphs in the tax and civil codes which enables companies to operate at their own discretion and have a high profit margin whereas this sector is strictly regulated worldwide by financial regulatory bodies.

Leasing missed agro-credits

It is not a secret that one of the most leasing dependent industries is agriculture and processing which still is much below par in Georgia. To give some impetus to both sectors, the Georgian authorities decided to link agriculture processing and leasing sectors within the frames of the preferential agro-credit project which started on 27 March 2013 and implies state co-financing of credits for farmers and agriculture related enterprises. The program consists of seven components and one of them envisages the disbursement of seven-year long credits between USD 30,000 – 600,000 under 3% of ceiling interest to enterprises involved in agricultural product processing.The co-financing rate ranges within 12%, thanks to which the agriculture loans usually charged with 15-17% become available for 3%. Three leasing companies participated in this component along with 13 banks. However, the result was only palpable to banks. Their agriculture loan portfolio increased more than six times from GEL 59 million to GEL 318 million in one year. 70 new enterprises were set up and 400 old processing plants rehabilitated and re-equipped. However, none of them took on any leasing products. According to the leasing companies, they stumbled on two key reasons: the unified cap limit and the restricted product list. Low awareness also played a role. “The key problem was that we were put under one limit cap while the banks are much bigger with larger capital which makes it hard to compete,” Tiko Gobejishvili, CEO of Georgian Leasing, said. “Banks are capable to go on much big capital and leave no room for us. The clients that responded to our criteria took banking loans first and we could not meet the limit because it was already taken up by the banks.” Some enterprises did respond to the limit, but even they did not keep proper financial documentation to enable leasing companies to understand whether or not they were reliable. The leasing sector says participation in the project will only be reasonable if the limits will be separated and the product list will be unlimited. Eliava still believes the high price of leasing companies and their bad marketing skills were the real problem. “Very likely the interest rate was so high that the state did not co-finance it,” she said. “Leasing companies enjoy a regulation-free operation and what else would they like from the state?”

Better buy than lease…

Jagpal (Paul) Singh, Director of the Agriculture Movement AidGeorgia - an organization that bridges the Georgian agriculture sector with foreign investors, believes that buying machinery is much cheaper in Georgia than taking out a lease. In 2010 he bought 340 hectares of agricultural land in Kakheti, Shida Kartli and Tsalka and grows potato, canola, lentil, wheat and barley. He also plans to set up a canola oil processing factory in Tsalka where he started cultivation of canola which is something quite new for Georgian farmers. But Singh says canola is very cheap to grow and available to small farmers who do not have access to big financial resources. Singh also plans to set up a state of the art cattle breeding farm for meat. However, he plans to buy all the needed techniques necessary for both the oil processing factory and the cattle farm. The reason is simple: it is easier and cheaper compared to the leasing prices in Georgia. Born in India, which ranks second worldwide in farm output, and living in Canada because of his permanent citizenship, Singh runs business at both places. He is well aware of the leasing benefits from personal experience in India and Canada where leasing charges by no more than 4-5% while in Georgia the price starts from 18% as the leasing companies’ recent advertising rolls inform. “For example, according to my calculation, if I take a tractor that costs USD 20,000 for a five-year-lease I will pay 50,000 in total. The leasing system is not developed here, because it is not correctly done. This system is well developed everywhere else abroad, even in developing countries like India. India has a population of 1.2 billon, but it manages to feed them and export agricultural products because a farmer receives big support from the government,” he elaborated. “In India 95% of the banks are owned by the state and every bank has a quota to give for instance USD 500 million to agriculture, the Reserve Bank of India regulates this issue. This is a mandatory and if a bank does not meet this requirement its director will be fired. Besides they [the state] are subsidizing the interest rates.”During his five years of farming practice in Georgia, Singh has low awareness of Georgian leasing companies. All necessary farming machinery he gets at the state owned Mechanizator Ltd which has a large network of outlets in every region. He believes around 80% of the local farmers also rely on the Mechanizator service. He conjectures this is kind of a predicament to leasing development in Georgia. Another factor that hurdles Georgian leasing is that the majority of Indian farmers [who came to Georgia when the previous authorities put up agricultural lands for sale to foreigners] takes all necessary equipment from home because it is easier, cheaper and secured – they prefer to rely on the equipment that is familiar to them rather than depend on the service of indefinite companies at new place. As a matter of fact, both leasing and banking loans are so cheap in India that a farmer can buy a tractor on a loan within an hour and without much fuss.

Visa vs. the State and investors

But farmers in Georgia are left without any help. Financial institutions are not supportive and every product related to agricultural activity like pesticides and fertilizers are expensive. On the other hand, farmers have no storage infrastructure and have to sell their harvest to traders for next to nothing, while these traders enjoy huge profits at the secondary market. Singh believes this kills the motivation of local farmers and they become irritated when foreign people come along with enough money to buy lands and cultivate them. They start seizing their lands and blocking farming activity. They became more aggressive after the power shift in 2012 when the new authorities imposed a moratorium on agricultural lands sale to foreign citizens. For this reason Singh himself has no access to 75 ha of land in his ownership in Dzegvi, Kartli region while he is paying taxes for it. In spite of repeated addresses to the authority including the Prime Ministers’ office nobody undertook any action to solve this problem. The governmental silence encourages locals to go ahead with the anti-land-investors practice. Singh loses USD 1,000 per hectare every year. And he is not the only sufferer. His two friends who own 82 and 150 hectares in Derbi village, Shida Kartli face the same problem.Singh believes the key reason that led to this interest clash between the foreign and local farmers lies in the imperfect visa regime. The Georgian authorities have never specified any visa categories and set out no clear criteria for incoming foreign people. Obtaining a visa was available directly at the airport which led to crowding poor and unaware people from oriental countries in Georgia. Human traffickers took advantage of this and brought hundreds of poor people from India, Iran, China, and Egypt for agricultural opportunities. The newcomers bought small farming lands which led to interest clashes with the locals who felt unsecured and unhappy that some people of a completely different culture and mentality grabbed their lands while locals could not afford it. Once the agriculture heaven of Georgia turned to hell for foreign farmers the majority is willing to sell their lands and quit, but they are tied by the moratorium: they can only sell their lands to locals who cannot afford this expensive purchase. Singh believes the clue to the problem solution is identifying real investors before they cross borders, which will spare both the state and the investors from future problems. The new authorities made the visa terms stricter but they still have not set strong specifics on visit purposes. Now Georgian visas are not as easily available as before, but the problem took on another facet. Because nobody properly checks the backgrounds and financial papers of visa applicants they now frequently reject real investors. Singh himself was rejected to extend his temporary residence card recently and knows plenty of investors who were intent to enter Georgia but who were rejected. “People who buy only 4-5 ha lands or even 10 to 50 ha are not real investors, they just create a crowd and frustrate locals. Georgia needs bigger investors and farmers who can implement serious projects, bring in know-how and boost employment,” Singh said. And whether or not a person is willing to come to Georgia and whether this person is capable of this should be identified during the application procedure.

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